THE INSIDERS: Export credit agencies step into the breach

By bne IntelliNews August 17, 2013

Nicholas Watson in Prague -

Holding court on the terrace overlooking the lush grounds of the American Mission in Prague on a sweltering August day, Fred Hochberg, head of the US Export-Import Bank, is in ebullient mood.

Seated next to him is Danny Roderick, president and CEO of Westinghouse, the US nuclear company that's one the main reasons for Hochberg's visit to the Czech Republic. Westinghouse is in the midst of a battle with Russia's Rosatom to win the right to build two new nuclear reactors in the country, in a deal worth €8bn-12bn, and Ex-Im bank wants to play its part by offering low-interest loans to companies that buy American equipment and services.

"What Ex-Im Bank is successful at is keeping a level paying field, so that when Westinghouse goes into the marketplace our product is evaluated on quality and technical merits, not on some extraordinary pricing package offered by some other government or state-owned agencies [like Rosatom]," says Roderick.

Hochberg, fresh from being confirmed in July by the US Senate for a second term as president of Ex-Im Bank, presided over a banner year in 2012 - and 2013 looks like it could surpass even that. The bank's overall financing in 2012 exceeded $35.7bn, backing $50bn of exports by US companies. Exports in the year continued their recovery from the depths of the global crisis in 2008, with US exports reaching a then record high of $188.7bn set in December 2012.

This was then surpassed in June this year when US firms exported a record $191.2bn of goods and services, according to data released on August 6 by the Commerce Department, suggesting a better year in 2013. Exports of goods and services in the 12 months to June totalled $2.2 trillion, which is 41.5% above the level of exports in 2009. US exports have been growing at an annualized rate of 10.4% when compared with the same period in 2009.

With many parts of the global economy in the doldrums and weak banks constrained in the amount they can lend to large projects such as those for transport and energy infrastructure, that has opened up a lot of space for multilateral institutions and export credit agencies like Hochberg's. "Banks with the new Basel III requirements have a big disincentive to make long-term loans. These are projects that require vast amounts of capital and the financial crisis has changed the appetite of banks for long-term loans," Hochberg says. "We, however, are backed by the full credit of the United States government."

"As such, Ex-Im also offers capacity... We did a large [liquefied natural gas] project in Saudi Arabia last year worth $20bn - it's very hard to assemble $20bn of financing. These infrastructure projects have gotten so large and on such a scale that it requires a much broader portfolio of credit, much more a consortium to do the financing - and export credit agencies are being called upon more and more." For example, in May Ex-Im approved an approximately $500m direct loan to finance the continued development of the giant Mongolian copper/gold mine Oyu Tolgoi, which upon completion will generate approximately 30% of Mongolian GDP.

But Hochberg is keen to stress that it's not all about big business - a nod perhaps to Republican criticism that the bank is little more than a slush fund for a few big companies. Justin Amash, a Congressional Republican, has proposed a bill that would shut down the agency's financing activities after a year, then turn them over to the Treasury Department before closing Ex-Im Bank for good.

"There are two groups of US exporters who are having a particular challenging time getting financing: small businesses and very large projects, and it's in those areas where we excel," he explains. "The share of Ex-Im's loans to small businesses is up about 90% since President Barack Obama was elected and I got into this job in 2009. We've done more small business loans in four years under President Obama than eight years under President Bush. I think we have strong record when it comes to small business."

New markets

In terms of countries, the trend is definitely toward the emerging markets. In the 12 months to June, among the major export markets (ie. those with at least $6bn in annual imports of US goods), the countries with the largest annualized increase from 2009 were Panama (+28.6%), United Arab Emirates (+23.1%), Russia (+22.6%), Peru (+21.9%), Chile (+21.4%), Colombia (+19.5%), Hong Kong (+19.2%), Argentina (+18.5%), South Africa (+18.3%) and Venezuela (+18.1%).

Hochberg say his institution has identified about eight or nine key markets that US companies are having a difficult time finding financing to help local companies buy their products. "US companies are sometimes selling to countries that are hard to finance into," he says. "Kazakhstan, South Africa, Colombia - these are more difficult markets for banks to be comfortable in."

One lesson Hochberg says he learnt from his first term as president is that as important as those key markets are, equally important are key sectors that need financing to close the deal - for example, satellite technology, nuclear power, energy in general, large commercial aircraft, transport and mining. "So we try to fill the gap on products that are hard to finance and countries that are hard to finance."

Given the bank provides loan guarantees to foreign companies in 178 countries that do business with US exporters, clearly default rates are a key factor, but it's incredibly low even in this difficult economic environment. "I'm very proud of our default rate, we report to Congress every 90 days and we're running about 0.3% on our portfolio," he says. "Last year it was $37m on a portfolio of $106bn."

Looking ahead, Hochberg says he's optimistic about the prospects for the world economy and global trade. "The global economy is having some teething problems right now, but I think the medium-term prospects are quite strong. There's more people joining the middle class and this is going to fuel a huge and unprecedented investment in infrastructure: they want better healthcare, better education, power 24 hours a day - all those things that will drive growth. And the US will get its fair share of that."

THE INSIDERS: Export credit agencies step into the breach

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